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2.92 Billion Reasons That May Make Rio Tinto plc A Sell

Today I am outlining why I believe Rio Tinto’s (LSE: RIO) (NYSE: RIO.US) misfiring divestment scheme looks set to keep its stricken balance sheet under the cosh.

Asset sales still failing to ignite

Like a multitude of others across the mining sector, stock prices in Rio Tinto have leapt since the start of the month as optimism over future commodity demand has surged. Prices in Rio Tinto itself have risen almost 9% in less than three weeks.

Still, I believe that the company’s repeated failure to sell underperforming non-core businesses is likely to weigh on earnings looking ahead, with a total divestment value of $2.92bn so far in 2013 well short of what the firm would have hoped to achieve by this stage.

A confluence of operating problems across many of its assets, persistently weak commodity prices and the effects of a weak balance sheet has forced Rio Tinto to embark on an extensive review of its operations and implement a vast divestment programme. Just last week the firm agreed to sell its 50.1% holding in the Clermont thermal coal mine in Queensland, Australia to a joint-venture operated by Glencore Xstrata and Sumitomo Corporation for around $1.02bn.

However, Rio Tinto has been less successful in ridding itself of a whole host of other non-core assets — just last week, rumours circulated that China Minmetals is set to withdraw its approach to buy the miner’s Iron Ore Company of Canada business due to what it considers an extortionate asking price. The Chinese company is now considering making a bid for Glencore Xstrata’s Las Bambas asset.

Rio Tinto’s iron ore division has been on the chopping block since the beginning of the year, while the company has also struggled to attract firm interest in a number of its other significant assets. In August, for example, Rio Tinto put the stops on the sale of its Pacific Aluminium division as it failed to attract what it considered “fair value” for the business.

Whether or not the mining giant is significantly overvaluing its assets, or is in fact is simply a victim of the vast numbers of attractive projects up for sale across the mining sector which are driving valuations lower, is a matter for much debate. Still, as commodity prices across the board struggle — and thus undermine the projected value of its saleable assets — I believe that Rio Tinto will continue to experience troubles in selling its non-core projects.

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> Royston does not own shares in any of the companies mentioned in this article.